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O2Micro International Limited Tel. +44 (0)20 7232 3090 Fax +44 (0)20 7232 3099 www.iirgroup.com LSE:

O2Micro International Limited

11 July 2008

Update Report – 1Q 08 Results

FY 2008 and FY 2009 net sales and gross margin outlook broadly unchanged

ADR

BUY

Ticker:

OIIM

Target price:

US$9.43

Current price:

US$5.79

We reiterate the ADR a BUY with a 6-12 month target price of US$9.43 per ADR.

Hong Kong

BUY

Stock 1

Ticker:

0457.HK

Target price:

HK$1.58

Current price:

HK$1.10

The Hong Kong stock is expected to appreciate 44% over the next 6-12 months as the 63% fundamental upside is offset by the anticipated reduction in the Hong Kong stock premium 2 over the same period. The currency impact on the Hong Kong stock is assumed to be neutral since the Hong Kong dollar is pegged to the US dollar.

We reiterate the Hong Kong stock (1 ADR = 50 common shares) a BUY with a 6-12 month target price of HK$1.58 per share.

Supervisor: Shilpen Shah Analyst: Shazia Naik Editor: Heloise Capon Global Research Director:

Satish Betadpur, CFA

Next news due:

2Q 08 results, 30 July 2008

Report summary

O2Micro International Limited’s (O2Micro) 1Q 08 net sales increased 7.2% y-o-y and gross margin increased 392 bps y-o-y, driven by increased efficiency in product design and a favorable product mix, in line with our expectations, However, adjusted non-US GAAP operating and net margin 3 were marginally below our estimates. Going forward, we expect O2Micro to continue to benefit from the ongoing market transition from Cathode Ray Tube (CRT) to Liquid Crystal Diode (LCD) based displays. Moreover, growing demand for mini-notebooks, steady demand for LCD-TVs and notebooks and increasing acceptance of the company’s products are expected to augment net sales growth and limit the impact of overall industry weakness. Furthermore, Management’s cost reduction initiatives are expected to support margin expansion. Subsequently, our net sales and gross margin outlooks for the company in FY 2008 and FY 2009 remain broadly unchanged but we have revised downwards our adjusted non-US GAAP operating margin 3 estimates to reflect a higher than previously anticipated increase in Research & Development (R&D) expenses. We maintain our optimistic outlook for the company based on the factors outlined above. Given the recent decline in the ADR price, the stock offers an attractive investment opportunity at current levels.

Currency impact for US investors

The company reports in US dollars, which is its major trading currency. Earnings forecasts are therefore also expressed in US dollars. Although the company has costs as well as revenues in other currencies, we assume the impact of currency movements on the price of the ADR to be neutral. Where specific currency risks are identified those will be highlighted in the report.